Monday , 26 June 2017

The U.S. May Engineer A “Soft Default” – Here’s Why and How

When government is wounded, trapped and desperate, it lashes out like a wild animal. Survival in the political class is just as strong a drive as it is in the wilderness. I don’t know how government will lash out, but you are likely to see laws, restrictions and behavior you never imagined…. Washington has demonstrated it will “print money” in whatever quantities necessary to stave off a sovereign bankruptcy and a Great Depression but this strategy cannot work forever because existing debt is already too high to be serviced. It is only a matter of time before the U.S. economy succumbs – unless it engineers a ‘soft default’ [which will save it’s ass and get you shafted! Let me explain.] Words: 1394

So says ”Monty Pelerin” (a pseudonym derived from The Monty Pelerin Society) in edited excerpts from his original article* as posted at .

Lorimer Wilson, editor of (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.

Pelerin goes on to say, in part:

Both Europe and the U.S. have gotten to their desperate states as a result of social welfare systems that have run out of control. In the U.S. politicians have borrrowed and used the printing press to spend more than government collects and to buy votes with promises that cannot be kept. As a result, the U.S. is insolvent just like Europe.
The U.S. government is in somewhat better shape than its European counterparts, however, for two reasons:
  • It controls the world’s currency, the dollar. So long as this lasts (and it lasts only until an alternative is found), it has more wiggle room in terms of its ‘extend and pretend’ options. The dollar will likely be a short-term beneficiary of the disruptions in the Euro as capital flees out of Europe into whatever is considered a safer haven. Ultimately, the dollar will weaken when it becomes apparent that the political class in Washington is jeopardizing the dollar and U.S. solvency. The U.S. political class has no way of solving the country’s problems. They have chosen to sacrifice the dollar in order to extend their time in power.
  • Its fiscal condition is not quite as bad (yet!). At current government spending rates, that differential is disappearing rapidly.

Washington has demonstrated it will “print money” in whatever quantities necessary to stave off a sovereign bankruptcy and a Great Depression. This strategy cannot work forever because existing debt is already too high to be serviced. It is only a matter of time before the U.S. economy succumbs. Easy money will not produce an economic recovery, nor will it avoid another Great Depression. It is a last gasp strategy to defer the inevitable rather than to face up to the problem(s).

If this strategy is continued, the dollar will eventually decline toward Voltaire’s definition of fiat currency’s intrinsic value — zero. Before that, I suspect, the government will engineer a “soft default.” A soft default is one where obligations are honored in nominal terms, but not in real terms. It is easily done via high inflation.

I speculated elsewhere about the issuance of a new dollar as a means to achieve such an outcome. It is simple, quick and devastating. In such a scenario, the U.S. changes currency much like Greece. Here is how such a scenario could play out.

  • The U.S. declares the old dollar null and void, requiring all old dollars to be converted into “new dollars.” This conversion is more dangerous to US citizens than it would be for Greek citizens for two reasons:
  • All contracts and obligations in the U.S. are denominated in dollars. The government could easily mandate that all existing claims can be honored by payment in full with “new dollars?”
  • There is no competing currency in circulation in the US. Citizens would not be able to arbitrage against a competing currency.

Let’s look at an example of one way this could happen. Government issues new dollars at the rate of 3 new for 1 old dollar. That is an immediate and massive devaluation of the dollar. In effect,

  • all creditors would be harmed by being paid off with dollars now worth 33% of what was originally lent,
  • borrowers would benefit to the degree that creditors lost. Real debt would effectively be reduced by 67%. Who would be the biggest beneficiary of such a ruling? Why the US government!
  • all government promises like social security, welfare payments, medicare, etc. might also be deprecated. Who wins again? The US government! Is there a pattern here?
  • Those harmed most would be lenders. In this case, it would be anyone holding US Treasuries like US citizens, China, Japan, etc. It would also be the U.S. banking system which could not survive without massive additional government bailouts but government has already shown its propensity to do whatever is necessary to keep the financial system alive.
  • Apparent beneficiaries would be consumers and the housing markets. Real consumer debt and mortgages would be effectively reduced by 67% (as incomes would presumably triple). Of course they would be harmed by the bailouts necessary to make the banks whole, but many would not even see the connection.

If such a devaluation played out as described, the government would effectively “default” on two-thirds of its debt obligations while, almost assuredly, maintaining that it was honoring them. Government would lose credibility, and be accused of bad faith by credit markets, but time would eventually heal those concerns.

Voila! Debt problem solved, but not the economic problem.

  • Inflation would at least triple, presumably raising many incomes and prices accordingly but price inflation is never uniform, so additional distortions and inequities would be infused into the economy.
  • The strategy would not avoid a Great Depression. It might in fact bring one on sooner as the loss of purchasing power to the elderly (anyone dependent on fixed incomes), the poor and those on government assistance ripples through the economy.
  • Further, such a strategy could trigger hyperinflation which would reduce markets to barter, essentially guaranteeing another Great Depression.

A massive wealth transfer would have been effected away from the productive sector toward the unproductive (government) sector.

The scenario just described might be considered unlikely, but it is exactly the strategy government has pursued since the economic crisis. Actually it is a strategy followed even before the current crisis:

  • Since the formation of the Federal Reserve in 1913, 96% has disappeared.
  • Since 1980 inflation has stolen 80% of the dollar’s purchasing power.
  • Since 1980, the Fed has effectively given you new dollars for old dollars (at least in purchasing power value) at a ratio of 4 new for 1 old

so how far-fetched would it be for them to declare an emergency and repeat this action only in a shorter timeframe?

It is difficult to be specific regarding a currency default/issuance of new money in the U.S.. The possibilities are there, easily accomplished and done before, just in slower motion.

Two areas may provide signals that something is about to occur:

  1. Markets: Markets often force action before it is politically desirable. Erratic movements, especially in exchange rates, might signal the imminence of such action. A rapidly rising price of gold would also likely precede such a currency event as the ruling class and their crony friends dump the dollar in advance and buy gold and other hard assets.
  2. Politics: The political class will do what is in their interests and what they believe they can get away with. As sovereign bankruptcy nears, the courage to default via a currency event increases. What was considered politically impossible then becomes merely unpalatable. Further, as the country devolves further towards totalitarianism and away from the Rule of Law, those in charge will be more emboldened to act….


The world is headed for a debacle in financial markets and living standards. Both will be preceded by currency collapses. The declines in Europe and here will trigger conditions unlike anything before experienced on a worldwide basis. Greece is merely a small canary in a small coal mine. Pay attention to how this canary dies, because it may help you survive what is coming to your personal coal mine.

For me holding dollars and dollar-denominated assets is dangerous. Good luck and hunker down for some unbelievable times ahead.


Editor’s Note: The above article may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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  1. Here is what I believe will happen before the US Dollar (US$) takes a big plunge in value:
    I believe that the dollar (US$) is ripe for a really big devaluation, just like Mexico did right after NAFTA was signed.
    I can see 1 New BUCK (NU$) equal to say 100 “old” dollars (US$), that way we would reduce our foreign debt by 100 times OVERNIGHT…  This could only be done when the Dollar (US$) is very high because then the rest of the World would have to accept it because they are holding all our paper money.  US COLA adjustments to Social Security and or Medicare would be “fuzzy” as all adjustments are.  The FED would be seen by most as helping the US economy as many things would have to be adjusted but it would all be done in the name of US domestic financial security!
    Another way this could happen is if the FED simply dumped a hundred times as many “newly created” dollars (US$) into the marketplace over a weekend.  I like the first scenario since an added benefit to the US would be that all the Billions in bogus or the illegally gotten money would have to be declared to be exchanged to New Bucks (NU$).  Additionally these New Bucks (NU$) would be traceable with new state of the art anti-forgery technology, which would save the US Billions of dollars (US$) annually due to forgery.  The other thing that this would do, is that it would prevent the value of Gold and or Silver from skyrocketing because face it, cash is much easier to use than very valuable coins.  If nothing else, this new monetary “coinage” (NU$) would allow all the other Countries to then readjust their own “coinage” and thereby delay everyones conversion to a new “globalized” commodity (Gold or ???) standardized currency OVERNIGHT…
    For me, the signs are coming into place:
    The Japanese Are Dumping Their Gold
    With China starting to accept the Japanese Yen without any relationship to the dollar later this Summer
    China and Iran are now trading in Oil without converting to the dollar (US$)
    So the time is ripe now, before the US does not have this BIG option any longer, because we are the Worlds greatest consumers and everyone is holding our paper, this gives the USA an option that no other country now has at least until the dollar (US$) starts to tank…
    If devaluation occurred at the same time the US President announced a huge Rebuild America Now Program, (using “fuzzy” money they “saved” since they would have to pay it in interest, if not for the devaluation) then the US public would accept it because everyone would be working again and that in itself would jump start the US economy! I think it would be something even bigger than this: China unveils £1 trillion green technology programme
    AREA Required for Global Solar

    If the USA started to “modernize” itself, the rest of the planet would also jump onboard or be left to trade with itself!  If this new effort was also coupled with a robust international plan to move toward Energy (and raw materials) from Space, then it would be like the race to the Moon all over again!  The USA could Champion Solar from Space and then lead the World toward a safe new future; these books explain how:
The High Frontier by Gerard K. O’Neill,
    Colonies In Space by A. Heppenheim­er.
    The Third Industrial Revolution by G. Harry Stine
    The Space Enterprise by Philip Robert Harris
    Mining the Sky by John S. Lewis
    Space based Energy and “off planet” raw materials could completely “connect” all the countries on Earth and redefine all the limitations now placed on mankind that are now “only” based on Earth’s own resources…
    Either we continue to use up what is left of the Earth’s dwindling resources as we have been doing and “accept” ever more financial and actual strife or we take that “One Small Step Upward” into Space, because that is where our SAFE future lies…
    BTW: What is your favorite “safe” currency for say the next two (2) years, not counting the US$?

    On numerous occasions I have read where respected economists and pundits have stated unequivocally that there are only two ways our government can clear its debts. One way is to debase our money supply and with enough inflated dollars pay off what we owe. The other way to clear our debts is to default.
    It seems that we have chosen the inflation route to resolve our debts. And maybe eventually we could inflate our money supply with enough almost worthless dollars that we could pay off our creditors. The problem with this approach is first of all “it is not working.” Furthermore as we continue to inflate away our dollar making it worth less it will finally become worthless. We will inevitably experience hyperinflation and that would not only crash our dollar but our whole economy.
    On the other hand – What if we were to choose to default? There is no doubt that this would throw the world economy into absolute chaos. But then hyperinflation would do exactly the same thing. I understand that clearing our government of its debt by simply not honoring our obligations seems morally wrong. Otherwise, inflating our dollar to make it worth less in order to pay our debts is just as wrong morally. If we did default, on the positive side we would not continue to be indentured debt slaves. The debt, mostly owed to China was taken to satisfy our greed to buy their cheap goods and live the good life. China loaned us the money knowing full well that we could never pay them back. They made those loans so they could continue selling us the goods they were making cheaper than we could produce them. So those loans that China made were to satisfy their own greed to steal away our manufacturing jobs and build their own industrial revolution at our expense. The Chinese have not honored our patent rights nor have they hesitated to steal intellectual property. They have not been morally righteous in their dealing with us and two wrongs do not make a right. But should we quietly sit and permit them to make us and our future generations indentured servants to their wanton growth at our expense.
    It is not hard to see that a default of such gigantic amounts of dollars would cause enormous turmoil in world markets. However beyond being clear of debts we could never pay, we would also have an opportunity to rectify some of the wrongs that got us into this untenable position. We are a strong country of willing workers who would love the chance to rebuild our manufacturing base. We have a large economy and we could exist just for our domestic needs without borrowing from other countries. It is obvious that we might wind up the pariah to the rest of the world as deadbeats on our debt so it would make no sense to depend on borrowing from other nations. Things would be tough but the opportunities that would lie before us would engender that good old “American Spirit”. We are a nation of innovators and I truly believe that necessity is the mother of invention. And financially we would not be totally bankrupt because our country holds more gold than any other country in the world.
    We need an intellectual and knowledgeable debate/discussion on whether we should continue to oblivion through debasing our money or should we bite the bullet and just let our foreign creditors know that we choose not to pay.

  3. The author’s scenario has been played out in 100 countries in the last two decades. But these were not the top ten economies. In this case, the “old dollar” is just as good for inflationary purposes as this “new dollar.”

    A new dollar will not magically appear, devalued by a third. Its got to go much lower than that. Our liabilities are way more than three times the $15T in federal debt. Its more like eight times.

    Anyway, our 2012 dollar is approaching the 100:1 loss ratio compared to the 1912 dollar. What cost one cent a century ago will soon cost a dollar. And, by the time our leaders are through with it, a one cent item in 1912 will be a hundred dollars.

    After all, inflation is the only way the politicians can fulfill all of their promises in terms of salaries, pensions, contractual obligations, and so on. The Fed is counting on continual global systemic crises to make our rapidly inflating dollars more attractive than any other majour currency.

    Inflation is a long process in most cases. The comic hyperinflationary blowout is very short but it takes a while to get there. It took Germany nine years to go from the stable Goldmark of July 1914 to the wheelbarrows of paper in October 1923. Same with Jugoslav dinar in 1990 compared to the hypercrash in 1995, or Russia’s dystopic inflationary period of 1991-1998, when a final crash demanded revaluation.

    In my opinion, we have a good couple of years before the big banks begin dumping their cash onto main street and really bump up prices. First we need more QE from the Fed.

  4. The Author states that no other currency is in circulation and this is true , However , also in the mix are those who have stockpiled both Gold and Silver and this the author did not address . Although most of the US population has little if any Gold or silver those who do are going to be far better off than those who don’t . This article seems to me to be a shout out to get as much Gold or silver as you can . Silver being a good buy at around $ 27.43 an ounce. Good Luck if you don’t buy some .